The Central Bank of Denmark analyzed the recent revisions to the crisis management rules, including the Bank Recovery and Resolution Directive or BRRD 2. In the analysis, the Central Bank highlighted that the new rules make it more likely that senior unsecured creditors will have to contribute to the crisis management of a failing credit institution. The Bank notes that, along with the resolution authorities, the senior unsecured creditors must also be aware of this risk and should take it into account in the risk management process.
The analysis published by the Central Bank noted that crisis management framework is still being developed, with a revised crisis management directive (Bank Recovery and Resolution Directive or BRRD2) having recently entered into force in Denmark. Danish FSA has, so far, required that Danish banks must meet their whole MREL requirement with subordinated liabilities—that is liabilities that bear losses before senior unsecured claims. With the revised crisis management framework (BRRD2), a maximum limit has been introduced for the subordination requirement. This means that there are limits to how large a share of the minimum requirement for owns funds and eligible liabilities (the MREL requirement) the authorities can demand must be met with subordinated liabilities. Subordinated liabilities include capital instruments and senior non-preferred debt. The new maximum limit for the subordination requirement makes it more likely that senior unsecured creditors will have to contribute to the crisis management of a failing credit institution. Contributions may take the form of the liabilities covered by the creditors’ claims being written down or being converted. Senior unsecured creditors now also risk having to make contributions in situations that are regarded as normal loss scenarios from a crisis management perspective. Senior unsecured creditors include large corporations with deposits of more than EUR 100,000.
Where the resolution authorities perform a bail-in in a crisis situation, they may, in exceptional cases, exempt liabilities from the bail-in. It is important that the resolution authorities use such special bail-in exemptions sparingly as a tool for exempting some senior unsecured creditors from having to contribute to the crisis management. A liability should only be exempt from bail-in if there is a very weighty reason for this, such as a consideration for financial stability. The cornerstone of the crisis management framework is that investors and creditors of an institution must bear the losses. Thus, a deviation from this principle should only happen when absolutely necessary.
Keywords: Europe, Denmark, Banking, BRRD2, Crisis Management Framework, Resolution Framework, MREL, Bail-In, Danish FSA, Central Bank of Denmark
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